Question #1: China

I haven't been posting any trades for a while, and I don't think I will try to post every single one, too much to keep up with. But this is still a good place to put my thoughts to pap...er...anyways.  This is the first of 4 questions I want to answer for possible trades in 2016.  Positioning is extreme in many areas, all betting on further dollar strength, China weakness and oil oversupply.  While some amount is not incorrect, parts of that reasoning are past their time and momentum has (and will likely continue to for the time being) carried these trades too far.  My 4 questions concern: 1) China's economic growth and rebalancing; 2) EM's caught up in the wave of selling that don't necessarily belong in a group with, say, Brazil; 3) USD strength: against which currencies can this reverse and when?; 4) Oil - oversupplied but relatively balanced market - when will the price bottom and will we see a quick rebound or a gradual one?

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So I'm going to leave the "analysis" (more like scattered thoughts) below as-is for the time being.  Long story short, stabilization in China will require more fiscal policy measures, and some monetary ones won't hurt either.  The question is: to what extent is Xi willing to anger many in his country who depend on industry and construction for their wealth - and their jobs - to continue the rebalancing?  At the moment it looks like targeted programs (e.g., urbanization, Yuan weakening, export and auto tax cuts) are it for fiscal policy; that won't be enough.  Are there plans in the works to hit the 6.5% growth target for 2016 (or are we about to find out its going to be lower?) (will they fund African/EM infrastructure projects to use, rather than close, their excess capacity?).  If not, how bad do things need to get before they step up the support?  I don't know the answers to these questions, but I need to find out.  Without that, all of the below is just yada-yada-yada.

I.e., to understand the economics, look at the politics

Trade

I think its only a matter of time before dollar strength resumes, and I don't have time to try and get perfect timing.  Euro may rally a bit more from here though...

Low leverage short June '15 6E (EUR/USD) @ 1.1240


Update:
Time to man up.  The day after the trade above, I fucked up.  Stupidity is the cause of this disaster, not being incorrect.  Not only did I get caught up in price movements, I overlevered and traded under pressure - I broke 3 of my 5 rules simultaneously (5 rules that have taught me the hard way how to protect my money).  Massive loss of 55%.  The only bright side is I live to fight another day.  But it will take me alot to get back to where I was; I am furious with myself.

This week's trading

I will update my chart and the end of the week.  I doubt I will do more day trading this week, but may enter more trades.  I'm eyeing short EUR/USD, its just a question of when, I think.

5/11/15
More day trading again.  Don't like it, but opportunities present themselves, I have to take them.  The only one I regret last week was betting on UK elections.  Even though all polls for weeks had said the same thing, I jumped in to the trade with little research in to the situation; it was a gamble, pure and simple, and I don't want to do that.
Today, downward momentum seemed to have stalled in EUR/USD, so I used heavy leverage to bet on a snapback, which happened.  I quickly exited to take profits.

Long June '15 6E (EUR/USD) @ 1.1146, closed at 1.1155, gain of 5%.

Trade

Dollar surged vs. Euro overnight after being a bit oversold.  Since I think NFP will be softer than expectations, its hard to see losing money by being long EUR/USD here, so I placed a low-leverage EUR/USD long. Placed a long EUR/GBP as well.

I am anticipating, then, weak NFP and alot of confusion surrounding UK elections.  I hope at least one of those is correct, lol.

Basically long the Euro vs. $ and pound, medium leverage total.
Long June '15 6E @ 1.1266, low leverage
Long June '15 RP @ 73.90 low leverage

Update:
Dozens of polls over weeks and even today and yesterday in the UK election seem to have been off, and looks like the Tories will be able to govern.  I closed my position after watching a few seats that should have been Labor going to Tories, so it seemed to confirm the exit poll, which was sharply different than opinion polling the last few days and weeks.

Update:
Closed EUR/USD at 1.1269.  I was wrong about NFP but EUR/USD spiked anyways on the news, which gave me the opportunity to close an inch higher.  I'll watch the price action today and may or may not make another move.

Loss of 11% on the week, the EUR/GBP trade killed all my gains and then some.  Don't trust British pollsters!

Newer trade

Despite the lackluster ADP report, EUR/USD looks way extended on the day, medium leverage short June '15 6E @ 1.1353

Update:
Extended as it is today, EUR is like a freight train.  Closed even, I thought it would go a little lower so I hung on, but it came surging back.  I'm going to keep watching because it looks like its making another run to the day's high.

Updated Update:
Shorted again, heavy leverage at 1.1369, stop set up at 1.1366.  If it stops me out, I'm done for the day, buyers win, lol.

Updating my Updated Update
Closed out at 1.1353.  I thought it would go a bit lower, but looks like EUR is set to run a bit longer.  I think consensus expectations for Friday's NFP are too optimistic, and the dollar will sink a bit more for a week, or a few weeks, we'll see how it plays out.  I do think US data will get a little better this month, it just won't show up on Friday's NFP.  I'm likely to sit out until after NFP comes out.

Gain of 3.8% on the week (all this week's gains and losses, including today).  I updated my chart to show just one trade this week which accounts for them all.

New Trade

ISM non-mfg came in stronger than expected, and EUR/USD soared after the initial selloff.  The move looked a bit overdone, so I shorted with low leverage, looking to close out intraday.

Short June '15 6E (EUR/USD) @ 1.1193, stop set up at 1.1208

Update
Looks like there was more to go.  Heavy buying in a few spurts after European markets closed pushed EUR up fast on no news.  Stopped out.  Thinking it has again run its course, Short 6E @ 1.1217, stop set at 1.1223, medium leverage.

I'd be interested to know where the heavy buying interest is coming from all of a sudden.

closed at 1.1208.  Gain on trade, but loss for the day is what I reported in the last trade, so I'll leave it at that.

Trade

I'm going to take a small gamble (aren't I not supposed to do this?)...consensus strongly agrees that RBA will cut rates today, and I just don't see it.  Inflation is stable and will recover as oil prices do (the 1.3% was lower due to oil and ore prices that have since rebounded somewhat), employment is improving (even if only modestly), and AUD/USD is below .80.  I don't think Stevens sees it either: he made some comments suggesting as much a few days ago, and the last few years have shown that he's not much of a dove.

Reasons I'm ok making a small gamble with low leverage on a short term trade:
1) There doesn't seem to be a need to cut rates right now, 2) economists have called RBA rate decisions wrong the last few months, 3) the rate cut is priced in, so if it goes wrong, the damage won't be too bad but the upside will be far greater.

I'm closing this trade out within a day, one way or another.

Long June '15 6A (AUD/USD) @ 78.24

Update:
Bet didn't pay off, but it was small risk, high reward, and I'll take those all day.  Closed @ 77.84, loss of 4%.
Update2:
And of course, I exit way too soon.  Just spiked over 78.84, not sure why, the statement wasn't hawkish, it just wasn't dovish.  In fact, it said "The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices."

Ideas

Right now I still think currencies are the best way to make a leveraged trade, so my focus is on the dollar, relative to EUR, with GBP (election jitters?), JPY (net positioning is even) and AUD (downgrade?) in the corner of my eye.  I think US equities will peak this year, possibly this summer (and Chinese equities at some point soon will bubble-peak), at least for the foreseeable future, but I'll cross that bridge when I come to it.  Before I go in to analysis, I think its important to remind myself that whatever trade I make must not be over-leveraged; I don't want to be spooked or forced out of a position.  The time to make a homerun swing at the dollar was last summer, which I didn't spend enough time focusing on, and made overleveraged bets that I was too scared to lose gains from.  Short AUD looks interesting, especially since Goldman suggests they may be downgraded within months, but I think China will continue to ease monetary policy.  I only have the capability to pursue one opportunity at a time, and I think the better one is EUR/USD.

EUR/USD is my main focus because it offers action and I think the market has a tendency to exaggerate, which provides opportunities.  The bounce off the lows seems to be in part: 1) short covering, 2) weaker US economy, 3) improved Euro fundamentals, 4) hope that Greece will be solved without a mess, and 5) small reversal of bond yields.  I want to explore each in detail:

1) Short Covering
Net EUR/USD short positions are hovering near record levels, which gives me the greatest pause for jumping on board the bandwagon.  On the one hand, I tend to see herd behavior and extremes as a signal that things are about to turn, and turn fast.  On the other hand, the last few years has shown that the herd can run for a while before that happens, and EUR/USD shorts have been extreme for a while and have continued to make money because EUR had been so strong (and $ weak) for so long.

Speculative net shorts are also at extremes but are moving fast in the other direction:

Leveraged money also remains very short, but as a smaller percent of outstanding contracts...

2) Weaker US economy

It doesn't even seem worth doing more than mentioning that the US economy has struggled in 2015, from a higher dollar and dislocation from lower oil prices and the market wringing its hands over the impending rise in FFR.  These have, and will continue, to effect employment.  But the weather is warming (psychological effects), oil is firming, the dollar is weakening, so Q2 looks set to be mediocre (large inventory buildup to work through).  I think it will be enough to have a rate rise by September.  I still think June is on the table, though, as I think the Fed really wants to get off ZIRP.

3) Improving Euro fundamentals

Loans to the private sector have finally started moving up, as has credit growth in total:

M3 has resumed growth:

Inflation has stabilized, and with oil prices increasing, will likely increase as the year goes on:

Unemployment is moving in the right direction:

PMI's and IP showing stability, at least:

And the current account surplus has grown, thanks to an improving balance of trade:

All in all, the economy is (very) slowly improving and that looks set to continue for a bit longer.

4) Greece

Here (combined with 5) is where I think the biggest prospect for more EUR weakness lies.  Greece seems intent on dragging out the negotiations, but is running out of both cash (government and banks) and time (deadline for negotiating a new MOU, [cough] pardon, "partnership" is June, and Greece continues its unilateral social programs and its MP's and ministers are openly rejecting compromising, suggesting new elections if Syriza doesn't get it's fantasy deal with Euro).  They continue to do lip service, e.g., replacing Varoufakis, repeated lines about continued privatizations, fulfilling their commitments, etc., etc., but there is no substance.  Ultimately, they have only a few choices, e.g., capitulation or referendum/new elections.

Greece is being given a gift by not being declared in default by ratings agencies if(when?) they miss a payment to the IMF or ECB.  But they will still be downgraded, and Greek banks will still see outflows and the ECB will be even less inclined to ease ELA restrictions, and taxpayers will continue to "postpone" payment of taxes and they will circle the drain and, I believe, be forced in to one decision or another by the end of the year, maybe even the summer.

5) Net issuance of Euro debt, after ECB purchases

Zerohedge posted an interesting article (via BNP) about the effect of net issuance of Euro government debt after QE on rates.  That would suggest continued  EUR strength for the next few weeks, followed by EUR weakness through the summer and beyond.

Conclusion

If Greece misses payments to private creditors, or the banking system require capital controls, contagion is possible, but likely to be short lived given the options the ECB has said they are willing to use.  Buying bonds will push yields down further, sending money looking for higher yields (such as the US) and enabling a large carry trade.  If this plays out, I think parity with the US dollar is possible by the end of the year.

But with the continued short-covering, weakness in the US (for now), deflation off the table in Euro, hope still existing for Greece, and net issuance of Euro debt for the next month or so, I think the EUR/USD still has room to move up, maybe, 1.16 - 1.18 by end May/early June.  That could change alot, however, depending on this week's US data.  I don't have enough conviction to go long EUR/USD because I think it will be a short move, so I will wait for things to play out before deciding if/when to pull the trigger on short EUR/USD in a month or so.

Then again, consensus for NFP is still over 200k, so there still may be opportunity to go long EUR/USD...will watch this week.

Closed Trade

Closed short EUR/USD June'15 @ 1.1339, gain of 19%.

The idea behind this trade was to take advantage of the nervousness surrounding a Greek deal.  It was set back a bit by the FOMC minutes, but was ultimately a winner.  I think if the new Greek government continues course, two things will happen: 1) they will run in to stiff resistance in their own party and may have to change course (unless/until it becomes overrun by opportunists leaving other parties); 2) medium/long-term, the economy will improve and modernize.  There are still many risks, but it looks like Greece was bluffing not just the Eurogroup, but their electorate.  In the end, not necessarily a bad outcome.

Will continue to watch whether this gets through Greek parliament...

New trade - for real this time

Avoided the oversold bounce, shorted EUR/USD June'15 @ 1.1383, low leverage, stop loss order in place.

caught by the (silly) rumors of an imminent deal.  I think if anything, what will be formally asked for is a loan extension on terms already unacceptable to EU/Germany (they haven't yet asked for money with no strings attached though...).  Using this as an opportunity to double-down; I have some appetite for a loss (I feel somewhat strong in my thinking on this...)

short EUR/USD June '15 @1.1405, medium leverage, will watch closely.

Looks like any deal will come down to the wire, so I should at least pick up gains from an ever-more-nervous market.  Upside potential (downside for EUR) coming from: 1) approaching Grexit due to lack of agreement between Greece and Europe; 2) more-hawkish-than-expected FOMC minutes on Thursday; 3) Ukrainian deal going south (seems almost a when, not if).

Near term target of 1.12-1.13ish, depending on circumstances, testing 1.10 if we pass Feb. 28 with no deal, and lower if things in Greece start to unravel.  Really, though, this one is going to have to be winged (decision to stay with trade depending on circumstances).

UPDATE: 2/18/15, 2pm: FOMC minutes being interpreted by market as possibly pushing rate hike out until September +.  I don't see that language in the minutes, but ok...In addition, the statement was made before January payrolls came out, along with JOLTS data, etc.  As long as data proceeds as is, June is still my bet based on what FOMC has been saying for a while.  But...the market doesn't see it that way, at least not yet.  The trade buffer I had before the minutes (50 pips) is gone, and I would expect another pop of EUR/USD once Greece makes its request tomorrow and/or when eurogroup leaders agree to meet on Friday to try and work something out.  I think the market has been lulled to sleep by constant bailouts and doesn't realize that it won't be that simple.  If a face-saving way is found, I think it will be after the weekend, and I only put that at 50/50.  SYRIZA has not had enough time in power to enjoy its trappings nor become jaded by it, and I think they still intend to fulfill their election promises.  They have options even if they don't renew the bailout - including a quasi-blackmail of the U.S. over Ukraine and Russian bases in Greece; bank closures/capital controls/depositor haircuts?  Cyprus-style bank rescue - to buy time to negotiate a new aid package with the EU.  In the meantime, they may go back to the polls to ask the people which way they want to go.
FOMC minutes interpretation now raises a serious possibility of loss on my part if a deal is hammered out before the end of Monday.  I could be looking at a 30-40% loss.  For now, I'm going to take that risk.

UPDATE 2/19/15, 9am:  The text of Greece's loan extension proposal indicate that Greece thinks Germany's issues with their positions are rhetorical.  It says it will work with the institutions that comprise the troika, but doesn't say troika.  It says it will fulfill the conditions of MFAFA (which include following the Memorandum of Understanding) but does not mention committing to the terms of the MoU.  It ambiguously (and somewhat duplicitously) mentions it will cooperate with not-troika on measures to "(a) to attain fiscal and financial stability and (b) to enable the Greek government to introduce the substantive, far-reaching reforms that are needed to restore the living standards of millions of Greek citizens through sustainable economic growth, gainful employment and social cohesion."  In other words, we'll work with not-troika on the measures that we want to implement, not the ones we don't.
On the one hand, the ambiguous language leaves open the possibility for compromise and a solution.  On the other hand, Tsipras and Varoufakis have said repeatedly and as recent as yesterday that they will not simply sign on to an extension of MoU, so unless they are completely full of shit and bluffing, no compromise will come about because Germany does not seem to trust Greece at all.  For their part, Germany may compromise on a few token, face-saving parts of the MoU, but unless they are completely full of shit and bluffing, they will require Greece's unambiguous commitment to fiscal targets, reform measures et al.  That leaves a gap without a bridge; someone will have to look bad, and I don't see it being Germany (the rest of the Europeans, maybe, but not Germany -- could Germany be pressured by the rest of Europe to bend more??).  That means Greece will fold, right?  If Tsipras is a rational player, yes.  If he believes his own bullshit, then no.
So who is Tsipras?  (info below ordered in the order it was found, not in order of importance):
- He "cohabitates" with his "partner" of over 20 years, who encouraged him to join the communist party in college.  They are both engineers, she from lower class, he from middle class.  She hates shopping and publicity.  They lived in rather modest apartment in Athens.
- He idolizes Che Guevara: "Tsipras’s office was adorned with a poster of Ernesto “Che” Guevera." (when running for PM in 2012); "His youngest son’s middle name is Ernesto – a tribute to Che Guevara, one of his idols." (born 2013).
- From FT: "Although close associates say Mr Tsipras remains the same person as the student activist 25 years ago, those who have disagreed with him insist he has changed — becoming more moderate, and less anti-EU — as he has risen to the top."
- In 2012, he ran on a platform of leaving the Euro, which he now calls a "paranoid plan".  "Last time, Tsipras came out swinging against Europe and its currency.  This time he is picking his fights, and trying to build alliances across the southern tier of the continent."  In 2012, Syriza declined to form a government because their potential partner refused to drop their commitment to the MoU.  Syriza has been the main opposition party for 3 years - not new to parliament like Podemos or Beppo Grillo.
- Syriza's chief economist and adviser to Tsipras is John Milos: “I am a Marxist,” he says. “The majority [in Syriza] are.”  The article headline is that he believes the humanitarian crisis in Greece to be the most important issue.  Interesting comment in the comments section(1) though.

So Tsipras is/was a Che-loving communist, who seems to have great charisma, vision and patience and is very politically astute.  And for a (moderate) communist, seems to be rather pragmatic.  He previously campaigned on leaving the Euro if necessary but has since changed to a more politically palatable tone of "no other option but Europe."

I think Germany wants the Greek albatross to be gone once and for all, and to use it as an example to other populist parties of Europe - that is the only way to stem the rising tide of anti-austerity populism (Jan. 7 - leaked statement: Merkel ok with Grexit).
 Last night I reviewed all the public quotes made from main players since January 25, along with anonymous leaks and public statements; there is compromise on semantics, but not on substance.  Varoufakis said this morning that the request for loan extension was a take-it-or-leave-it proposal.  I think Tsipras will do what he said - when the Eurogroup rejects their plan, Greece will ask for Europe's best offer and take it to a referendum.  No telling what the results will be or if it will force them to capital controls and drachma (or IOU's) or blackmail US/Europe for aid to negotiate something else, etc., etc.  I do think we will pass the weekend without a deal.  Not enough pressure is being placed on either side to compromise what seem like positions that no one has any intentions of compromising, at least not yet.

So the interpretation of the minutes (after re-reading, I can see how it can be seen as opening the possibility to delaying rate hikes past June - if nothing else, it raised the odds) has been a setback to my trade, but I should still make money during next week's trembling that is likely to occur when it is apparent that there is no deal.  And since No One knows what the next steps are (only conjecture at this point), the market will sell first and ask questions later.  As long as this analysis holds, I would target 1.12 by the end of next week.  Whether to exit there or hold on is something I'll have to wing.

notes:
(1) "I'm involved with Syriza at a local level and the big problem is that the hardliners - mostly ex-KKE - are unhappy with the wheelings and dealings going on with ex-PASOK members (for example local supremos like mayors and councillors who can see the writing on the wall and want to keep in the game).  Syriza are radical only in the name - they are swinging to the centre more and more as they smell the power. And in Greece that can only mean getting into bed with those who are responsible for the endemic nepotism and corruption. This is the tragedy for all the real radicals who want a clean slate."

UPDATE: 2/20/15, 3:30pm:  Tentative deal reached, more than I thought today, but actually about the same except everyone was able to call it a deal.  A "deal" will be reached when it Greece's Monday proposals are approved by Germany.
Listening to Djisselbloum at the Eurogroup, Greece is being given a change to choose the switch with which it will be whipped, that no legislation will be made without approval.  Listening to Varoufakis, Greece's list of reforms submitted on Monday will be their own ideas, and if Europe rejects it, they'll be up shit creek...but of course, he says their is so much goodwill between the sides that they will both agree through the weekend before their proposal is submitted; they will be "co-authors".  We'll see about that...
I'm about even on my trade right now, slightly green, so I'll wait and see what the weekend and Monday bring.  I may end up taking a 10%-20% loss on this trade.

UPDATE: 2/22/15, 12pm:  I don't want to marry my position and have been brainstorming counterarguments to my outlook, and think that at least short-term, it may make sense to cover my short today or tomorrow.
EUR/USD net shorts are near an all-time high (even though levered positions are not), Euro data is coming in better than expected, and Syriza seems to either be 1) bluffing, which they have now backed off from at the last second, or 2) playing the Eurogroup for time, and for fools.  Either way, absent a list of ambiguous, inadequate or unpalatable "reforms" to be enacted in the coming months, there seems to be room for a Euro rally.  I'll be closely monitoring the Greek proposals and am willing to cover my short position quickly should the Greeks appear to negotiate in good faith with proposals the Germans would be willing to accept.  Hopefully any loss will be small to moderate.